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being expressed, I think, in a letter to Senator Capper, a copy of which he sent to me--that the capital ought to be increased to $50,000,000.
Mr. LUCE. Why does the capital have anything to do with the limit of the banking possibility; why are they not limited solely by the amount of debentures that can be marketed?
Mr. ANDERSON. Of course, the gentleman is right. At the same time, the capital of a discount bank, like the capital of any other bank, it represents in a sense the margin of safety which the depositor has in the bank. The investor will not take the bonds if the margin is too small, except at a discount.
The CHAIRMAN. It affects also its ability to accumulate these loans in large quantities?
Mr. ANDERSON. Of course it does. •
The CHAIRMAN. The same problem is involved in the Federal farm loan system. We increased the capital there so they could increase mortgages in sufficiently large quantities to enable them to sell $50,000,000, $75,000,000, or $100,000,000 lots.
Mr. STRONG. They could not issue debentures on the bonds until they had them, and they have to have capital in order to buy them, and if they only had $1,000,000 they could only buy $1,000,000 worth?
Mr. ANDERSON. Of course, the bonds could be issued, and I think have been, in anticipation of loans as well as based on loans already made.
The CHAIRMAN. The Federal farm loan system is dual—the joint-stock land bank system and the association form. In the joint-stock land bank system the stock is owned privately by subscription. Your plan is based more upon the association plan, the Government putting up the capital. What do you think of the suggestion of permitting these banks to organize along similar lines to the joint-stock land bank system and let the capital be owned privately? Some such plan was indicated by Mr. Meyer before the committee the other day as a method of financing cattle loans,
Mr. ANDERSON. I have given no very great consideration to that. I am frank to say that if it is poss ble to do this thing by private capital, then I think it is preferable to do it. But I doubt very much if you could very much meet development on that basis.
The CHAIRMAN. Mr. Meyer made the statement before the committee the other day that he believed there was available for financing of cattle, for instance, a capital which is already interested in the financing of cattle paper to the extent of between $9,000,000 and $10,000,000. Your bill provides for $12,000,000. That capital might be utilized in the same manner and be privately controlled, rather than calling on the Public Treasury.
Mr. ANDERSON. I still think, if you are really going to get any action under this proposition, that your initial stock will have to be subscribed by the Government.
Mr. STRONG. Mr. Chairman, I would like to suggest that for the benefit of the record I think Mr. Anderson ought to put in the skeleton of his bill. We practically all know what the bill is, but I think that in order that the record might be complete he ought to discuss the bill without interruption, and then let members ask him questions.
Mr. ANDERSON. I shall be very glad to discuss it. I feel I have already taken a good deal of the time of the committee in the discussion of things more or less extraneous and in the attempt to establish some kind of a background for the bill.
I should like to make this additional statement, that under the provisions of this bill the farmer would get his long-time credit in the same place and in the same way as he now gets short-time credit. He would get it without reducing, I think, in any substantial way the ability of the banks to meet the farmer's short-time credit requirements or the industrial short-time credit requirements.
The CHAIRMAN. That is to say, he would go to his own local bank and make his arrangements through that bank?
Mr. ANDERSON. Exactly.
Mr. MACGREGOR. He would not be as close as he would under the mortgage loan, because he goes to a board now personally does he not?
Mr. ANDERSON. You mean he would not go directly to the bank of discount? Mr. MACGREGOR. He would not go to this board?
Mr. ANDERSON. No. But he would have what I think is a great deal bettera point of contact with the system in his own locality, the same point of
contact which he has when he makes a loan for less than six months. I think that the great merit of the proposition is in the fact that it does utilize the 30,000 odd points of contact which the financial system of the country now las with the farmers of the country.
Mr. King. Will the bankers of the country generally cooperate with this plan? They did not, all of them, cooperate w.th the War Finance Corporation efforts.
Mr. ANDERSON. I think that is a matter of development, and I will be entirely frank about it. I suspect that in normal times there might not be a great deal of use of this facility, but in times of financial stress, in times of expansion, this additional facility would be in existence, and the requ'remnts of the farmer could be met.
Mr. LUCE. On the second page of your bill, Mr. Anderson, on lines 10 to 16, you make no discrimination between the various uses of capital raised in this fashion, and it is perfectly possible, I take it, under line 14, used in the first instance, for an agricultural purpose, for a local bank to lend money on a three-year note to a farmer for the purpose of buying farm machinery. What are you going to say to the machinist in the town when he wants to borrow money for three years to put machinery into his garage or repair shop, and you will find that the law allows the banker to borrow money for three years to buy a tractor, but you do not allow the repair man to borrow money for niore than three months to buy the lathe with which to repair the tractor?
Mr. ANDERSON. Of course, the lathe becomes a part of the permanent investment of the machinist, I take it.
Mr. LUCE. Does the tractor become part of the permanent investment of the farmer?
Mr. ANDERSON. It is not attached to the land in the same way.
Mr. LUCE. You are, I think, evading-—I do not mean any disrespect-but you are not meeting the point I want to raise: Why we should devise a banking system to allow the farmer to get working capital and not allow the machinist to get working capital on equally favorable terms.
Mr. ANDERSON. Well, if there is any reason, I think I could assign this one: There is obviously to-day a shortage of beef cattle in this country; there is also a shortage of sheep in this country. If the people of the country want meat, and they want cheap mutton and cheap wool, they will have to find some way of furnishing the productive credit necessary for that added production.
Mr. STRONG. And that shortage was brought about by deflation and compelling the farmer to sell the “she” stuff of his herd?
Mr. ANDERSON. Exactly so.
Mr. MACGREGOR. You come back to that old point that has been thoroughly disproved.
Mr. STRONG. It has not been disproved in the minds of men who have investigated it.
Mr. LUCE. I do not mean any captious criticism in this matter. I am merely wondering whether it is wise for us to give such general power to banks easily to raise capital for other purposes than those which we recognize should be arranged for. I do not believe that we fail to realize that the ordinary farmer has a year's turnover, and perhaps we should provide for it; that the live-stock man needs three year's loan. But this goes very much further than that; this goes to the point of making it perfectly easy for a small bank to furnish farmers with the capital necessary to buy their
machinery and their tools, to build their outhouses and the pig sties and dig ditches and all that sort of thing. I am wondering if that is a prudent thing.
Mr. STRONG. Our present financial system lets a business man have money to fix up his buildings, to improve all of the surroundings of his operations and his business, also the manufacturer and everybody else.
Mr. LUCE. Not in theory; that is not commercial credit; that is investment.
Mr. LUCE. Having simply brought out that difficulty, let me call your attention to one other point, page 7, beginning with the nineteenth line, where you provide that the State bank or trust company shall not be examined unless it is willing to be examined. What is the purpose of that?
Mr. ANDERSON. Of course, we have no power, I think, to require a State bank to submit to exaniination. I assume if it did not permit examination it prob
ably would not have extended to it the facilities which this bill is intended to provide.
Mr. LUCE. That is the point I want to bring out. What legal obstacle would there be in the way; how could it be prevented?
Mr. ANDERSON. How would what be prevented?
Mr. LUCE. How would you prevent your State bank from borrowing money from your Federal land bank if it declined to have an examination ?
Mr. ANDERSON. It would simply refuse to l'ediscount their paper.
The CHAIRMAN. That would be sufficient grounds for refusal, if they declined to submit to an examination of assets.
Mr. LUCE. I see in here no limit to the volume of the loans which any bank may put through in this fashion. Is there any difficulty there, then, in the way of a small bank very greatly extending its loans if it has at its command always the power to discount the paper with the Federal land bank?
Mr. ANDERSON. There is not any limit except the sound judgment of those who operate the Federal land banks. Such a limitation could be put in, and I should have no objection to it.
Mr. STEVENSON. The banks of original discount who would take that paper to Federal land banks for rediscount are all limited. There is a limit involved as to the amount of discounts that they can make, or usually is, and as for national banks they are limited and they are controlled by the comptroller, who certainly limits them to prevent them from going to an excessive expense in this kind of paper.
Mr. LUCE. A national banker is limited by the very nature of circumstances and can not loan more money than he has.
Mr. STEVENSON. If he can borrow more, he can.
Mr. LUCE. That is just what I was uncertain about-to what limit can he borrow.
Mr. STEVENSON. There is a limit to the amount he can rediscount, and that is not only some statutory limit but there is a limit of the power of the Comptroller of the Currency to permit overextending.
Mr. LUCE. I have been looking through the national bank act and could find nothing of the sort, and was curious to know.
Mr. STEVENSON. Before the Federal reserve act was passed a national bank could rediscount no more than the amount of its capital and surplus. That has been somewhat relaxed under the Federal reserve bank law; under that the Federal reserve bank can rediscount for a national bank any amount it wants to. The rediscount limitation now applies only to rediscount with other banks than the Federal reserve banks, so far as national banks are concerned. You overlooked that. I guess, in the national bank act.
Mr. LUCE. Very likely. That is why I asked the question, because I wanted information; but I wondered if there was any restriction on State banks as to the amount they may rediscount. Do you know, Mr. Chairman?
The CHAIRMAN. There are some limitations under the various State laws as to the amount cne bank can borrow from another,
Mr. STEVEN SON. It is not at all uniform?
The CHAIRMAN. Of course, they would not be able to rediscount to any greater extent than member banks would be with this system. That is practically unlimited, as Mr. Stevenson says, under the Federal reserve law ani! the amendments.
Mr. LUCE. Only one more question. You are more familiar with the western situation or conditions than I am, Mr. Anderson. Why, in your judgment, has not private capital met the live-stock situation ?
Mr. ANDERSON. Of course, it has met it to a degree. I am told that the people who have done the larger part of the live-stock financing are very much disposed to get out of that line of business.
Mr. LUCE. That is because it is hazardous?
Mr. ANDERSON. No; because it is a different line of business than they are otherwise engaged in. Let us be perfectly frank about it. I understand—I do not know whether it is true or not—that the larger part of the live-stock financing of the country is done by the packers, and I am told that they want to get out of the business, because it is not a business which couples up very well with what they do. They are constantly under the suspicion of using their connection through the live-stock loan companies to compel the sale of cattle at
periods when it is not satisfactory to the people who own the cattle to sell them.
Mr. LUCE. Assuming that they did get out, what has puzzled me in the studies I have made--and they have not been restricted, I assure you, in this thing—is the general fundamental question of why the public should embark in a field of activity which, because of its hazard or for some other reason with which I am unfamiliar, has not attracted private capital. In the structure of society we find private capital readily and quickly flowing into any field where there is a reasonable chance of profit with a reasonable degree of safety. The question, therefore, troubles me greatly as to how we may justify the entrance of the Federal Government into a field that private capital has avoided and will not enter. You see it is a basic question.
Mr. ANDERSON. Personally, I do not think your premise is correct, because private capital has to a certain extent entered this field. The gentleman would certainly not suggest that we do away with the Federal reserve system, which after all is the same kind, substantially, as the bank of discount which we provide here. It is true that the banks of the country have furnished the capital for the Federal reserve system, but the method under which they were required to furnish it, I recall, at the time was referred to as similar to the method used by the highway man who sticks the pedestrian up on the street and tells him," Now, you can do as you please about forking over your pocketbook, but I have got a gun, and if you do not certain things will happen to you."
Mr. LUCE. Let me illustrate by a concrete situation : In my region for many years such concerns as the Lombard investment companies—and there were many of them, and they have their successors—asked the eastern investors to furnish money on farm mortgages, because it was shown to be a safe and profitable business. But I can not recall that anybody has ever organized to invite eastern capital to lend money in live-stock financing. Maybe I am wrong in my deduction that that indicates that live-stock financing is in and of itself so hazardous, so precarious, and so unprofitable as not to furnish an attractive field for private enterprise?
Mr. ANDERSON. I do not think that you can assume that it is because the business was speculative. I think it was largely due to the fact that there has been no legislation providing an agency or outlet for the longer-time paper.
Mr. STRONG. Mr. Luce, can you any more arrive at that conclusion than you can the conclusion that what the eastern investor does invest his money in is always safe?
Mr. LUCE. The eastern investor always seeks safety, and I have wondered why that if it is possible to make 8 or 9 or 10 per cent in live-stock financing that private capital has not entered that field.
Mr. STRONG. But you hear every once in a while great crashes where great financiers have gone down because they have not invested safely.
Mr. ANDERSON. We stumbled along here for nearly a hundred years, I guess, with the worst banking system in the world, and the bankers of the country, or, so far as I know, the investors, did not undertake to provide any system of private reservoirs which would make the banking system of the country a safe banking system and provide for the expansion necessary in periods of great credit requirements. Nothing was done until the Government took hold of it, through the creation of the Federal reserve system, and provided the machinery through which the reserves might be created and the expansion or contraction, whichever it might be, should be accomplished. That is all that we are asking for here; that provision be made for the setting up of the necessary machinery for the discounting of this necessary class of paper for farm production.
Mr. LUCE. But that was built upon a foundation which experience had shown to be absolutely solid, namely, the short-time loan of money for purposes that ordinarily insured the repayment of the money. Here you are asking us to build on a foundation, namely, the live-stock notes, which experience seems to have shown to be in and of itself insecure and transitory.
Mr. ANDERSON. I do not agree with that at all.
Mr. STRONG. What men are getting out of the business? He only says the packers are getting out of it because they are subjected to criticism that they are using their credits to influence the markets, not because it is hazardous. The packers have made a great deal of money in that business.
Mr. LUCE. Then, my suggestion is that I fail to comprehend why the public should engage in it, inasmuch as it is stated that a great deal of money has
been made in the business, and why private capital should not equitably flow there.
Mr. ANDERSON. You must remember, Mr. Luce, that a bank of discount such as proposed here is no more a money-making institution than a Federal reserve bank is a money-making institution. We are not proposing to create here the agencies to deal directly with the farmer in making live-stock loans on a profit basis. We are proposing simply that there shall be a discount facility for this intermediate farm-credit equivalent substantially to the discount facility which the commerce of the country has in the Federal reserve system for commercial loans.
Mr. LUCE. Yes; but you have mixed up two things here. You have mixed up your farm credit where it might very well be argued that a one-year loan ought to be permissible with your live-stock credit where the three-year loan is permissible, and in doing that you have made it possible, and perhaps desirable, for the local bank to furnish the three-year credit for the farm purpose, not the live-stock purpose.
Mr. STRONG. Do you not believe, so far as stability is concerned, that a loan based upon live stock will be more stable than a loan based upon crops, which are subject to loss by the elements or by insects?
Mr. LUCE. I only observe that financiers generally are more willing to take farm credits than they are to take live-stock credits.
Mr. STRONG. In our country the bankers prefer a loan based upon live stock rather than one based upon a crop, because it is a more stable credit; it is more apt to come to maturity.
Mr. ANDERSON. And its value is constantly increasing?
The CHAIRMAN. I am of the opinion that, if the system is properly supervised, loans based on cattle are prime security; and under some properly developed system, such as is indicated by this bill or the plan which Mr. Meyer has proposed, private capital will seek investment of funds in that class of paper. I think one of the greatest hardships that arises, and the probable reason for decline of investment in notes of the cattle companies, is due to the fact that they have not felt that they were properly supervised ; in other words, it is substantially a floating collateral. The cattle are out on the ranges or in the hands of the owners, and if they are dishonest they might depreciate or they might dispose of the cattle; and under proper supervision all that would be obviated. It seems to me from my experience as a banker that that can be made a very desirable class of investment paper,
Mr. LUCE. How do you account for the fact that the live-stock companies have not flourished ?
The CHAIRMAN. I think it is largely due to the fact that they have depended to a certain extent upon the packing industry of the country for financial support. Many of these cattle-loan companies, although they were not owned entirely by the packers, were largely owned by them, and they, through their methods of operation, could let the cattlemen make money or not, just as they
I am inclined to believe that loans placed on cattle when properly supervised, and I think it important that they be inspected and the closest possible check he kept at all times on the cattle as to condition, etc., when they have obligations out on those cattle as a basis of security, and when it is known that that security is right, are as safe and desirable as any loans that may be made. This supervision is as necessary to cattle loans as to a banker or a financial institution when making loans on stock-exchange collateral, when a check up must be made every morning as to the value or quotations on the securities they hold as collateral.
Mr. LUCE. Yes; but you can call your note; you can not call a three-year note. What good would supervision do?
The CHAIRMAN. You have provisions under the terms of the granting of your loan which will cover that condition, just the same as you have terms in the notes secured by warehouse receipts. There are provisions that if the property deteriorates the loan can be called, or you can call upon the man who makes the note to make good the depreciation in values. There are many ways that that condition can be taken care of.
Mr. STRONG. Every cattle mortgage upon live stock I have ever seen has contained a provision that in case the security depreciates the party extending the credit shall have the right to call the loan.